Working with fund distributors is increasingly difficult, but vital. Our panel in New York considers the merits of scale in this environment, but also hears smaller asset managers can find a place in the market too. Chaired by Nick Fitzpatrick.
Angela Billick (head of offshore, John Hancock Investments)
Richard Garland (managing director, Global Advisor, Investec Asset Management)
Bev Hendry (co-head of the Americas, Aberdeen Asset Management)
Jeffrey Toussaint (head of business development, Ivy Funds)
Phil Enochs (head of relationship management – US and international, BMO Global Asset Management)
Funds Europe: To what extent is the fund management industry polarised between large and small players? Does size matter for an asset manager attempting to build a global business?
Bev Hendry, Aberdeen: In Europe, Aberdeen is a large player with a broad offering – but in the US we’re seen as a niche player. It therefore depends on one’s perspective, yet it is important to have as many different players in the industry as possible.
Richard Garland, Investec: An asset manager has to be big because major global distributors only want to work with perhaps up to 20 managers. If you’re not in that 20, you’re done for. If you’re in the middle ground, you’re going to get squeezed, and that’s the challenge. For small managers, it’s even a question of survival.
Dealing with global compliance, for example, means you need support on the ground. The industry is getting very tough.
Angela Billick, John Hancock: Yet smaller and medium portfolio managers can still develop if they find the right partners. For example, with our manager-of-managers model, we can select best-in-class portfolio managers that have a core capability, meet our rigorous investment oversight process, and bring them into our retail distribution networks. I fully agree there is polarisation, but if you’re in the middle ground you still can be profitable if you build strategically. Smaller players need to pick the places where they want to compete.
Jeffrey Toussaint, Ivy Funds: Without question, as a medium-sized asset manager it is becoming more and more difficult than it was five or ten years ago, because distribution relationships are becoming more challenging.
Years ago, you could virtually come in off the street and sell one unique strategy on a distributor’s platform; now, they want you to give them five strategies as they rationalise platforms down from perhaps 200 providers.
Garland: All the big banks are doing this, yes. Shrinking their platforms and finding ‘strategic partners’ with the promise of more market access.
Hendry: There is the pressure also to conform with everything distributors want. For example, you might have to set up a website just for them, so it’s inevitably tough for small, niche players to do business with big global platforms.
Garland: Distributors, particularly if they’re global, will want you to play in every space: domestic ’40 Act funds, offshore funds and then SMA [separately managed accounts]. They want uniformity across a platform.
Billick: A number of banks focus on specific income levels, whether it’s mass-affluent or high-net-worth clients. They’re looking for us to cater to them in a variety of ways – particularly helping their end investor navigate their access to so many fund choices. We have a dedicated portfolio construction team to help with this need.
Garland: And to work with a large distributor in the retail market where distribution is done through local branches, a fund management firm may have to cover the distributor’s 2,000 branches, which you can’t do with only five people on the ground.
Phil Enochs, BMO Global AM: In certain segments, size clearly matters. In the post-2008 environment, large firms, particularly well-capitalised, financially strong firms have a decided edge. And in certain areas, like core passive, scale creates an advantage.
That said, there are significant opportunities for smaller, boutique asset managers. The key to their success is offering strategies that emphasise their nimbleness or by delivering something that is unique or requires specialised knowledge, such as emerging markets expertise.
Funds Europe: How important is corporate brand for an asset manager?
Enochs: Studies have shown that, within the US intermediary marketplace, 90% of an adviser’s buying decision is made before they have any direct contact with the asset management firm. Clearly, brand and corporate identity are critically important. With information become increasingly more available, investors will be able to evaluate asset managers even more quickly and inexpensively, so that percentage is more likely to rise than fall. And while this effect is just beginning to be felt in the institutional marketplace, we are certainly feeling its impact there as well.
Garland: Brand is going to become more important because of the millennial generation, who are going to go online without looking for investment advice. Perhaps when an individual has enough money, they’ll want advice. But in the early days, they’re going to go online.
Billick: Beyond logo, brand is about client experience and this is very important to millennials, where peer-to-peer references count. Having great results in performance is important, but the overall brand can be affected if there’s someone out there saying they disliked their experience with a particular firm.
Garland: Performance may eventually be secondary to the ease of doing business. If it takes 20 pages to fill out an application form, forget it. With robo-advisers today, a client can fill in a questionnaire and have a portfolio in five minutes.
Toussaint: I ask myself if there is even enough branding room for all the asset managers we have today. There are not many other industries with the same amount of entities competing to sell similar products.
Garland: Brand is about what you stand for as a company: it can’t just be about being big. A firm has to work out what it stands for and your people have to live those values otherwise it becomes pointless. Investec is punchy. We started in an emerging market and so there is the feeling we have to prove ourselves a little bit, which comes through in the people we hire.
Hendry: Client service is a prime focus for us. Performance is going to come and go, but you can still give the client a good service and make them feel valuable.
As an industry, client service could be better. Complex regulations put impediments in the way of somebody investing in you and yet, as firms, we are trying to give the client a nice, straightforward way of investing their money. But regulation and this straightforwardness are not mutually acceptable.
Toussaint: That point goes back to polarisation where, if you’re big, you’ve got a lot more resources to help you get closer to your clients, giving you a competitive edge. Again, this is a challenge for small and medium-sized managers.
Billick: In the medium space in particular, there is a relentless pursuit to provide the right amount of information at the right time and in the right mode, whether through web, fact sheet, blog or Twitter. The complexity of delivering information is increasing. To enhance the client experience at John Hancock, we aim to be smarter about the timing of what we deliver and the mode in which we deliver it. And that’s about knowing who your client is, whether it’s a distributor or an end investor, and thinking really long and hard about what would be the best experience for them. This has to take into account their age and their need at a particular moment.
Garland: Much of this question comes down to thought leadership, something very well understood on the institutional side, though there are some firms doing a really good job on the adviser side, too.
Hendry: Advisers are swamped with thought leadership papers. An asset manager today has to be, literally, the leader in what they do to be listened to. This is how you differentiate yourselves and produce a white paper worthy enough for an adviser to send out to clients. People might look to Aberdeen for emerging markets or Asia Pacific, for example, but I’m pretty sure they’re not looking to us for US large-cap equity.
Garland: At Investec, we have seven different investment capabilities, which means we don’t have just one philosophy or one process. So we have to ask ourselves whether investors really want to hear about all seven capabilities, or about just a small number of them.
Toussaint: Yet, as we mentioned, distributors want wider relationships with fewer managers. It’s not as simple as being a fantastic emerging markets manager any more, because advisers want a bigger relationship that goes beyond that one strategy.
Garland: This is different to a decade ago when advisers would seek added value in their offering by finding an unknown, unique manager with an excellent strategy. The manager would become a gem in the adviser’s offering.
Billick: Advisers differentiate by saying they can assemble the investment pieces in a better way than a counterpart across the street does. However, they can further differentiate themselves beyond model construction if they’re willing to take a chance on a hidden gem, and partner with John Hancock who can help them understand how it may fit into their client’s asset allocation needs.
Garland: Unfortunately, hedge funds still play the role of hidden gem, which I find frustrating because the fees are ridiculous and, though there are always a couple that really blow the lights out, there are so many that are just very average.
Billick: Hedge funds may have made themselves hidden gems simply because of the walls they’ve put up in order for investors to get access to them. They have created mystique. The trick is going deeper to understand the value proposition as well.
Hendry: The mystique is aided by the fact only people with a large amount of money can invest with these funds. This is why liquid alternatives are becoming popular, because it makes the small guy feel he’s getting access to those types of strategies.
Fund Europe: Is the industry quick enough to harness technology in order to know and serve its customers better?
Billick: Teenagers and those in their early 20s are the biggest consumers through digital, but people often don’t start investing until later in life, so the financial services industry as a whole is moving at the right speed to be thoughtful about technology.
Security is a major point here. There is a zero tolerance for failing to prioritise cyber security.
Garland: I think we’ll be surprised at how things accelerate.
Billick: Right, but if we move too quickly in one direction, then we have to deal with new technology coming in every five years.
Garland: Yet, at the same time, it may not be an asset manager that changes the game. Nobody forecasted Amazon. What eventually will happen is there will be external companies coming in, perhaps a wireless company. There could be many variations on this and I don’t think we as an industry can spend the amount of money needed to keep up with the tech giants.
Billick: One way is for firms to continue to monitor the search engine phenomenon. Everybody uses a search engine, whether they are 18 or 88, and fund managers need to ensure the right websites are coming up in keyword searches. Is it your website coming up in searches, or that of a distributor or an independent product assessor?
Enochs: As an industry, asset management firms have historically been early adopters of technology to manage portfolios, with ever more sophisticated tools for portfolio managers, research analysts and traders. But they have been laggards in leveraging technology in marketing and sales support. Technology is the great disruptor, and its influence is just taking hold here.
Like many asset managers, we are allocating more resources than ever before towards digital marketing. Digital marketing can increase brand and enable managers to more surgically reach their target markets. Digital is already vitally important, and its import is definitely growing.
Toussaint: I agree the speed of development of applications is mind-blowing. But I question how quickly consumers are willing to adapt to using apps for investing. It’s one thing to have an app to have fun enhancing your golf game. But it’s a whole other aspect if you use it to manage your savings.
Billick: Firms might also consider the ‘gamification’ trend: millennials will want to play with it before they pay for it. It might be a stock market game, for example, that acts as a gateway for millennials to start investing. It is a challenge for asset managers and distributors to make this happen and we need to consider how social media may play a role.
Hendry: Aberdeen runs a share game for schools and they love it! Millennials will want to engage with their finances at home, online, while having fun. They will not want to go to an office and see an adviser. They’ll want to do it on their smartphones or iPads. They don’t want a statement every three months; they want to look at it every day on their mobile.
Funds Europe: How do you see the growth of passive investing compared to active, particularly within the 401(k) segment?
Billick: The 401(k) segment in the US has become increasingly more sophisticated in terms of understanding the available offerings that continue to multiply. Because investors will have more choices, this calls for more portfolio construction expertise.
Ultimately, the decision between active and passive will be driven by the risk-return payoff.
Also, it’s a question of defining the client need or the problem to be solved, and then finding the right product at the price the client is willing to pay.
We’re broadening our suite to solve many investor needs, including access to smart beta products. John Hancock just recently announced we are offering smart beta ETFs with Dimensional Fund Advisors.
Garland: When I look at the global distributor landscape and the use of ETFs and passive funds, investment is going through the roof. I think we’ll see within portfolio construction guidelines 20% to 30% of the allocation will be through passive vehicles.
Hendry: In the ETF market, about 70% of the money goes into about five firms and there is a massive amount of brand push to encourage investors to do this.
Garland: However, Investec would never launch ETFs. I see so many fund groups going into ETFs and I don’t understand it. I just think, ‘Why are you doing this?’
Hendry: Well, it’s a case of ‘if you can’t beat them, join them’. People see such flows going into that area and it makes them want to participate. It is understandable, because I’ve seen advisers move all their client funds into passive and, naturally, some firms will want a share of that pie.
Garland: But it’s a knee-jerk reaction, even a sign of weakness. An asset manager has to focus on what they’re good at and refocus the distribution strategy accordingly – not try and cater for every single whim out there.
Enochs: Fee sensitivity, the regulatory environment, and the agency relationship between fiduciaries and individual 401(k) participants all have and will continue to favour growth in passive over active management. What may, and likely will, dampen this change is the nature of the plan participant. They are ultimately responsible for their own success or failure, and historically, they have been slow to change their preferences.
Funds Europe: With demand for global equities growing, how might demand among US institutional and retail investors for specific investments in regions, such as Europe and individual emerging markets, develop?
Toussaint: This has happened in the US for some time, in fact. There are some structural issues that may hold back international investment – for example indices, or the asset allocation recommendations of large research houses – for many wire houses a moderate investor category will generally be given a 10% allocation to international equities out of their 60% overall equity allocation. However, if they are benchmarked to the MSCI World, then this already implies they should have 40% of equity holdings outside the US.
In our US domestic business we are seeing a great interest in international investing. Our best-selling fund this year has been a fund dedicated to investing in equities outside the US.
Garland: US investors have been investing in international equities for some time, but I would say it’s accelerating now. Investors will still avoid emerging markets, but will probably start investing more in Europe.
Hendry: We’re definitely seeing an increase towards international equities and it has to be because the non-US part of the MSCI World is getting bigger every year. I know the emerging markets have had a tough time, but there’s still growth in those areas.
Billick: It’s natural for investors to invest in what they know, starting closer to home. But there is an emerging investment theme now around global sectors. Think of a Russian oil firm extracting oil in Venezuela using US technology built in Japan, but the oil is purchased by Chinese consumers. It’s an energy sector story; it’s global sectorisation and we are seeing some products investing on that concept.
A second theme is regionalisation. This is not so much about developed markets or emerging markets, but getting a little tighter around two or three clusters of countries that are economically connected and provide an opportunistic return.
Funds Europe: What are the business drivers for mid-range US asset managers to expand overseas? Is domestic competition a factor?
Toussaint: Interestingly, I have seen fewer US managers trying to tackle Europe than I have European managers trying to get into the US offshore market in the past three years – more than I have seen in a long time.
Part of this may be because Europeans don’t want another US manager for US equities, but if there is a more interesting proposition, there is opportunity.
Enochs: While the US is the largest asset management market in the world, competition is intense and non-US markets are growing rapidly. We do believe many mid-sized US-based firms have been looking to non-US markets in search of growth.
Billick: John Hancock has also launched our offshore platform this year. Mid-range US asset managers can expand overseas and it can be done correctly, but again, only if you pick your spots and have the right distribution partners.
We made the decision that, with our strategic distribution partners, we want to service their clients wherever they happen to be. These partners liked our products and trust our reputation and brand, and they want us to bring what we offer to clients in the US and make it available for non-US investors. For our corporate shareholders, this also diversifies our revenue base.
Garland: I’ve watched so many US managers try and go offshore and so many times they make many mistakes – like domiciling in the Cayman Islands, or using inappropriate vehicles when they should have used cross-border Ucits funds.
If firms go offshore, they have to embrace it properly. You can’t just put your toe in the water.
Toussaint: You can’t make the assumption a strategy that works in the US will work elsewhere; you need to understand local markets and do your research. At the right time you will need to hire people locally who are experts there, yet also familiar with your capabilities.
Billick: You have to understand the product a particular market wants to buy and know whether it’s differentiated and what the wrapper should be. A particular type type of client may prefer cross-border funds, for example. Conversely, some US asset managers have been trying to get into the French market forever! But at the end of the day, the French use of cross-border funds is extremely low. It’s very, very hard to get into that market – similarly with Italy, though that’s changing.
Garland: Italy is the key market. The two best cross-border offshore markets are Taiwan and Italy.
Toussaint: But any asset manager who thinks they’re just going to walk into the Italian market, thinking they should be there because it’s big, will not find it easy.
Hendry: Italy is big for us, but you have to have offices there.
Billick: And you need a local partner. You can’t just go in there as a third-party asset manager and expect flows.
Garland: You need to have a local paying agent and it takes a long time to get everything operationally set up, including all the agreements in place.
Hendry: But once you’ve done it, the money comes in. In Italy and Latin America, we sell the same products in both markets.
Garland: Similarly, it’s going to be tough for Chinese asset managers to successfully launch funds outside Asia and be relevant, because they are pitching for such a small slice of the pie. And it is also the same challenge for the Latin American managers.
Funds Europe In broad terms, what is your level of optimism for the industry over the next few years and why?
Hendry: My level of optimism is pretty high. There are opportunities, particularly for Aberdeen, that go into new areas for us. We also think emerging markets will come back again. That’s a big opportunity. In the US market we’re quite a small player, but this is a big opportunity, too.
Garland: My level of optimism is very high. Investec is in the early stages of building a very strong global adviser business. Investec is kind of unusual because we have a domestic business in South Africa and the UK, and then we have a cross-border business as well. We don’t have a US mutual fund business and one of the things we have to look at is if and when we will enter the US mutual fund market.
However, the industry has a lot of work to do to regain trust. It’s unfortunate the asset management industry has become linked with banking and we have to do a better job at distinguishing ourselves.
Enochs: We are very optimistic about the asset management industry and our growth potential. Studies show asset management is expected to outperform other financial sectors in terms of growth, P/Es and ROEs. It is expected that, by 2020, the global asset management industry could approach $100 trillion in AUM. We believe investment firms that can successfully harness their global manufacturing and deliver very local solutions to investors should be well positioned to capture more of this growth.
Toussaint: The headwinds in our industry without question are going to be harder and greater. In the near term, we’re all talking about market issues, but market issues come and go.
Regulatory issues are on the forefront, making business more challenging and burdensome to asset managers and distributors. This, in part, has furthered the consolidation we’re seeing from a distributor standpoint regarding the number of asset managers they want to interact with, which is going to make it harder for us. There is also increasing competition because of the range of products out there, such as ETFs and exchange-traded mutual funds. We have also seen increased competition from ourselves, as managers, as many are growing their sales forces.
I am optimistic and see opportunity, essentially, driven by investors who need to prepare more for their financial future then they ever have before. Asset managers are a huge part of the solution. Asset managers that can innovate in terms of product or product delivery are the ones that will capture these opportunities.
Billick: Regulatory change has been difficult for asset managers to navigate, coupled with pressure to offer well-differentiated products that add genuine value. Those who will do well will be client-focused and very attuned to the client experience.
We have high optimism but mixed with a hefty dose of conservatism. We are risk-conscious as a firm. For more than 150 years, our brand is “promises kept”. We make sure that when we make a promise about a new product, that we can deliver.
©2015 funds europe
